Results of the Spring 217 Survey Vol. 14.1 3 April 217 The results of the spring reflect signs of a further strengthening of domestic demand following overall subdued activity over the past two years. This outlook is supported by foreign demand and an expected rebound in activity in energy-producing regions. Overview After a period of weakness, firms expect some increase in sales growth in light of improving indicators of domestic sales. Businesses in energyproducing regions perceive that a recovery is under way. Export prospects continue to support the outlook despite elevated uncertainty about the impact of potential US policy changes, notably corporate tax cuts and protectionist measures. Although many firms expect additional spending to be modest, intentions to increase investment have become more widespread, driven by strengthening demand. Hiring intentions remain positive overall. Pressures on capacity are still modest as excess capacity persists, notably in the Prairies. Firms expect a gradual tightening in capacity along with firming demand. Indicators of labour shortages suggest that labour market slack remains but is no longer widening. Firms anticipate little momentum in input and output prices because of still-important competitive pressures. Inflation expectations remain concentrated in the lower half of the Bank s inflation-control range, although they have edged up marginally. Most firms reported no change in the terms and conditions for obtaining credit, and access remains easy or relatively easy overall. Taken together, the results suggest a modest recovery in business sentiment after a two-year period of weakness, as summarized by the indicator (Box 1). The summarizes interviews conducted by the Bank s regional offices with the senior management of about 1 firms selected in accordance with the composition of the gross domestic product of Canada s business sector. This survey was conducted from 13 February to 9 March 217. The balance of opinion can vary between +1 and -1. Percentages may not add to 1 because of rounding. Additional information on the survey and its content is available on the Bank of Canada s website. The survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.
2 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Business Activity On balance, firms reported that sales growth has been stable over the past 12 months (Chart 1). The balance of opinion of close to zero continues to mask a divergence between the Prairies, where sales growth slowed, and the rest of the country, particularly Ontario and British Columbia, which experienced stronger growth. Although firms have, on balance, not seen an increase in past sales growth for nearly two years, they remain optimistic that sales will grow at a somewhat faster pace over the next 12 months (Chart 2, blue bars). This expectation is supported by improving indicators of future sales, such as new orders (Chart 2, red line), particularly in the service sector. The balance of opinion Chart 1: Sales growth has been stable over the past 12 months... Over the past 12 months, did your firm s sales volume increase at a greater, lesser or the same rate as over the previous 12 months? 4-6 21 23 25 27 29 211 213 215 217 Greater: 41 Same: 2 Lesser: 39 3 2 1-1 -2-3 -4-5 a. Percentage of firms reporting faster growth minus the percentage reporting slower growth Chart 2: and firms anticipate some firming of sales growth ahead Future sales (balance of opinion) a : Over the next 12 months, is your firm s sales volume expected to increase at a greater, lesser or the same rate as over the past 12 months? Indicators of future sales (balance of opinion) b : Compared with 12 months ago, have your recent indicators (order books, advance bookings, sales inquiries, etc.) improved, deteriorated or remained the same? 6 4 2-2 -4-6 21 23 25 27 29 211 213 215 217 Future sales: Greater: 52 Same: 17 Lesser: 31 Indicators of future sales: Improved: 61 Same: 24 Deteriorated: 15 a. Percentage of firms expecting faster growth minus the percentage expecting slower growth b. Percentage of firms reporting that indicators have improved minus the percentage reporting that indicators have deteriorated
3 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 reached its highest level in five years and indicates that, by a solid margin, businesses across the country saw better indicators of future sales than 12 months ago. The sales outlook is increasingly supported by domestic sales perspectives along with the expected rebound in energy-related activity. Respondents also referred to the favourable effects of the weaker Canadian dollar for exports and the tourism sector. Meanwhile, some firms believe that activity in sectors experiencing robust growth (such as housing and automobiles) could soon level off. Export prospects continue to support the outlook. Firms anticipate somewhat faster export growth, in light of improving indicators of future sales from foreign customers. A growing number of firms expect US growth to be strong, citing the new US administration s plans for expansionary policies and a related improvement in confidence. As in previous surveys, many respondents, especially manufacturers, believe that the positive US outlook will bring some export opportunities. Nevertheless, firms remain wary in an environment of elevated uncertainty about potential US policy changes. Although to date only a few firms have seen concrete effects, several see negative risks. These risks include increased protectionism, reduced competitiveness of Canadian firms in the event of corporate tax cuts in the United States, and possible delays in the implementation of pro-growth US policies. On the upside, some firms perceive possible benefits in relation to, for example, the Keystone XL pipeline and, in the longer term, potential infrastructure spending. The balance of opinion for investment in machinery and equipment continued to increase after a two-year period of weakness (Chart 3). Many firms expect the increase in expenditures over the next 12 months to be modest, and several are limiting investment to maintenance items. Yet, the result suggests that plans to invest in Canada have become more widespread, buoyed by firming domestic demand. Chart 3: Intentions to increase investment are becoming more widespread... Over the next 12 months, is your firm s investment spending on M&E expected to be higher, lower or the same as over the past 12 months? 4-4 21 23 25 27 29 211 213 215 217 Higher: 46 Same: 43 Lower: 11 a. Percentage of firms expecting higher investment minus the percentage expecting lower investment 3 2 1-1 -2-3
4 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Chart 4:...while firms, on balance, plan to add jobs over the next 12 months Over the next 12 months, is your firm s level of employment expected to be higher, lower or the same as over the past 12 months? 6-2 21 23 25 27 29 211 213 215 217 Higher: 52 Same: 34 Lower: 14 a. Percentage of firms expecting higher levels of employment minus the percentage expecting lower levels 5 4 3 2 1-1 Similar to the winter survey, exporters, on balance, are positive regarding investment. The spending behaviour of firms in regions hit by the oil price shock is also recovering, supported by improving commodity prices and business confidence. This increase in investment intentions partly reflects a modest catch-up after a period of cuts. The indicator of employment intentions is positive and similar to the winter survey (Chart 4). On balance, firms in all sectors and regions plan to add jobs over the next 12 months. Consistent with improving indicators of future sales, many firms plan to add staff to accommodate the anticipated increase in demand. Yet, a small number of firms are planning staff reductions because of a lack of activity or to achieve productivity gains. Pressures on Production Capacity Capacity pressures remain modest overall, suggesting that slack persists (Chart 5). Firms in the Prairies still refer to material excess capacity. The share of firms reporting that they would have difficulties meeting an unanticipated increase in demand is roughly unchanged from the winter survey, although more firms cited significant difficulties. Firms expect some emerging pressures on capacity going forward, with many referring to firming demand as the driving factor. On balance, businesses view labour shortages as having the same intensity as 12 months ago (Chart 6, red line). While the near-zero balance of opinion suggests that labour market slack remains, the indicator has continued to improve gradually since the oil price shock, as conditions in affected regions have bottomed out. Businesses in other regions, particularly in British Columbia, reported increasing difficulties in finding labour. The number of firms reporting that labour shortages are restricting their ability to meet demand decreased somewhat, returning to the levels observed since 214 (Chart 6, blue bars). Some firms mentioned that interprovincial workers returning from the oil patch help alleviate such shortages.
5 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Chart 5: Capacity pressures remain modest... How would you rate the current ability of your firm to meet an unexpected increase in demand? 7 6 5 4 3 2 1 21 23 25 27 29 211 213 215 217 Signifi cant diffi culty: 1 Some diffi culty: 29 Chart 6:...and indicators of labour shortages suggest that labour market slack remains Labour shortages: Does your firm face any shortages of labour that restrict your ability to meet demand? Intensity of labour shortages (balance of opinion) a : Compared with 12 months ago, are labour shortages generally more intense, less intense or about the same intensity? 6 6 5 4 4 2 3 2-2 1-4 -6 21 23 25 27 29 211 213 215 217 Labour shortages (left scale): Yes: 19 Intensity of labour shortages (right scale): More intense: 18 Same intensity: 65 Less intense: 17 a. Percentage of firms reporting more intense labour shortages minus the percentage reporting less intense shortages The summer 26 results are not strictly comparable with those of the other surveys, owing to a difference in the interview process for that survey. Prices and Inflation Input prices are expected to grow at a marginally faster pace over the next 12 months, as indicated by the positive, but low, balance of opinion (Chart 7). Firms anticipate that higher commodity prices will add to cost growth. A few also cited regulatory factors, such as cap-and-trade policies in Ontario and the carbon tax in Alberta, as contributing to their input price growth. At the same time, past exchange rate depreciation is now largely built into prices for imported inputs. Some respondents also indicated that their favourable bargaining power helps restrain growth in input costs, since they can actively seek out the most cost-competitive suppliers.
6 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Chart 7: Firms expect slightly faster input price growth... Over the next 12 months, are prices of products/services purchased expected to increase at a greater, lesser or the same rate as over the past 12 months? 4-6 21 23 25 27 29 211 213 215 217 3 2 1-1 -2-3 -4-5 Greater: 3 Same: 5 Lesser: 2 a. Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases Chart 8:...and output price growth to be stable Over the next 12 months, are prices of products/services sold expected to increase at a greater, lesser or the same rate as over the past 12 months? 4-5 21 23 25 27 29 211 213 215 217 Greater: 23 Same: 51 Lesser: 26 a. Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases 3 2 1-1 -2-3 -4 On balance, firms expect output price growth to be stable over the next 12 months (Chart 8). Firms cited several factors dampening price growth, including still-weak demand from commodity-linked customers, competitive pressures and limited bargaining power, particularly for those supplying large retailers. Others expect that gradually firming demand will allow them to pass on some cost increases, such as higher commodity prices, to their customers. Inflation expectations remain modest, with the majority of firms continuing to expect inflation to be in the lower half of the Bank s inflation-control range (Chart 9). Firms view slow growth as the main reason for weak price pressures. Overall, inflation expectations are marginally higher than in the winter survey: higher commodity prices and expected inflationary pressures in the United States are viewed as contributing to domestic inflation over the next two years.
7 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Chart 9: Inflation expectations remain modest Over the next two years, what do you expect the annual rate of inflation to be, based on the consumer price index? 1 26 27 28 29 21 211 212 213 214 215 216 217 Below 1: 3 1 to 2: 64 2 to 3: 3 Above 3: 2 No response: 1 9 8 7 6 5 4 3 2 1 Credit Conditions The balance of opinion on credit conditions remains near zero, suggesting that the terms and conditions for obtaining financing are unchanged (Chart 1). A widespread majority of firms report no change in their overall financing conditions, while those linked to commodities see a gradual improvement in their access to credit. That said, a few firms observed a tightening in the form of higher borrowing rates, which some associated with the recent increase in US long-term rates. Chart 1: Credit conditions are unchanged Over the past three months, how have the terms and conditions for obtaining financing changed (compared with the previous three months)? 6 4 2-2 -4 21 23 25 27 29 211 213 215 217 Tightened: 9 Not changed: 79 Eased: 11 a. Percentage of firms reporting tightened minus the percentage reporting eased. For this question, the balance of opinion excludes firms that responded not applicable.
8 BANK OF CANADA Results of the Spring 217 Survey Vol. 14.1 3 April 217 Box 1 The Indicator Points to a Modest Recovery in Business Investment While individual survey questions in the Business Outlook Survey (BOs) provide useful insights into specific aspects of business activity, a summary measure of the main survey questions serves as a gauge of overall business sentiment. the BOs indicator extracts common movements from the main BOs questions. 1 it tracks investment growth reasonably well (Chart 1-A) and provides early signals of trends and turning points in economic activity. Moreover, simple forecast models using the indicator provide current-quarter estimates of growth in business investment and gross domestic product. As such, it serves as a timely complement to the Bank of Canada s monitoring and forecasting of economic activity. the BOs indicator illustrates the slowdown in business activity in late 214 triggered by the oil price shock. the indicator fell below zero, i.e., below its historical average, although not as sharply as in the recession of 28 9. it remained negative for two years, consistent with the contraction in business investment over that period. the BOs indicator began to recover starting with the 216 17 winter survey, as the complex adjustment of the Canadian economy to low commodity prices slowly progressed. this swing in the indicator into positive territory is associated with improving business sentiment from a weak level, rather than with generalized strength, and points to a modest pickup in business investment growth in the near term. 2 Chart 1-A: The BOS indicator suggests a modest recovery in business sentiment after a two-year period of weakness Quarterly data Standardized units 4 2-2 -4-6 -8-6 21 23 25 27 29 211 213 215 217 BOS indicator (left scale) Sources: Statistics Canada and Bank of Canada 3-1 -2-3 -4-5 Business investment (year-over-year growth, right scale) Business investment (quarter-over-quarter annualized growth, right scale) 2 1 Last observations: Business investment, 216Q4; BOS indicator, 217Q1 1 For a technical discussion of the indicator and an assessment of its forecasting performance, see l. pichette and l. Rennison extracting information from the : A principal-component Approach, Bank of Canada Review (Autumn 211): 21 28 and l. pichette and M.-N. Robitaille, Assessing the Business Outlook survey indicator using Real-time Data, Bank of Canada staff Discussion paper No. 217-5 (April 217). 2 Business investment in the fourth quarter of 216 continued to contract, partly reflecting a reversal of the one-off boost to third-quarter growth from the arrival of an imported production module destined for the hebron offshore oil project. since the BOs indicator does not capture such special factors, it visibly diverges from investment growth in that quarter. Bank of Canada Offices Atlantic Provinces 171 Hollis Street, Suite 13 Halifax, Nova Scotia B3J 3M8 Quebec 151 McGill College Avenue, Suite 23 Montréal, Quebec H3A 3M8 ISSN 1916-476 Ontario 15 King Street West, 2th Floor, Suite 2 Toronto, Ontario M5H 1J9 Prairie Provinces, Nunavut and Northwest Territories 38 4th Avenue SW, Suite 2411 Calgary, Alberta T2P H7 British Columbia and Yukon 2 Granville Street, Suite 271 Vancouver, British Columbia V6C 1S4 Head Office 234 Wellington Street Ottawa, Ontario K1A G9 1-8-33-1282